Carta Policy: Weekly Brief for April 29

TL;DR

• Rep. McHenry to seek House Financial Services chair with agenda focused on capital formation and innovation

• McHenry wants Congress to develop a regulatory framework for digital assets outside of SEC, CFTC jurisdiction

• CFPB uses dormant authority to expand supervision into fintechs it believes pose risk to consumers

• Treasury and IRS invite public comment on Priority Guidance Plan; Carta working to submit tax policy recommendations

Macro matters

Congressional outlook

The congressional calendar is growing steadily more cluttered in the lead-up to the August recess and November midterm elections. Senate leaders made progress this week on parameters for the highly anticipated negotiations on the China package now known as the Bipartisan Innovation Act (f.k.a COMPETES Act). Carta remains focused on stripping a provision that would require the SEC to rewrite certain rules around private market capital formation. Congress will also consider additional aid to Ukraine, COVID-19 relief funding, approving nominations, and potentially a new version of Build Back Better. 

While the Senate confirmed Lael Brainard to serve as vice chair of the Federal Reserve in a 52-43 vote this week, the nominations of Jay Powell for Fed Chair and Phillip Jefferson and Lisa Cook to be Fed governors, remain pending. The Fed’s FOMC is scheduled to meet next week, where it is expected to announce a 50 bps interest rate increase. 

Build Back Better Act 2.0…

Lawmakers return to D.C. with a renewed push to advance the stalled Build Back Better Act ( H.R. 5376). Sen. Manchin spiked the roughly $1.7 trillion legislative package in December, but continues to express interest in a more moderate bill focused on energy-related provisions, prescription drug pricing, and deficit reduction. The politics remain difficult as some of Sen. Manchin’s proposed tax reforms such as raising the corporate rate and long-term capital gains rate conflict with redlines Sen. Sinema has outlined. We continue to urge policymakers to preserve the current tax treatment on qualified small business stock, which remains under fire.

Capital markets

McHenry poised to lead House Financial Services Committee next Congress

Patrick McHenry, the lead Republican on the House Financial Services Committee, announced this week he would forgo a House leadership run and instead seek the Financial Services Committee gavel should the Republicans gain control of the House in November, which is widely predicted. McHenry said he plans to pursue a policy agenda around innovation (see discussion on crypto framework below), capital formation, and oversight—which will likely be directed at financial regulators like the SEC and CFPB.

McHenry has been a key advocate for the startup ecosystem and innovation economy and has supported policies to promote more access to capital and ensure regulation does not stifle innovation. He has already put down markers on his policy priorities should he take the helm of the Committee. McHenry, a key architect of the JOBS Act and author of its crowdfunding provision, released a report containing a number of policy recommendations to build upon its successes, including:

• Modernizing the accredited investor definition to include additional metrics for individuals to qualify outside of wealth-based standards;

• Increasing retail access to the private markets through professionally managed investment vehicles;

• Expanding investment limits and qualifying investments for venture capital funds;

• Allowing gig workers access to equity compensation under Rule 701; and

• Expanding and improving the IPO on-ramp for emerging growth companies.

Many of these provisions are in line with the JOBS Act 4.0 package announced by Sen. Toomey. It is unlikely these provisions will move forward in a Democratic Congress, but Carta and our coalition partners have started laying the groundwork to build bipartisan support with the hopes of advancing a number of these provisions in the next Congress.

A McHenry chairmanship will also be helpful in pushing back against an SEC agenda that could make raising capital in the private markets less attractive. While Chair Gary Gensler can and is still likely to move forward, congressional opposition would make it more uncomfortable, especially if there is bipartisan pushback.

Crypto & digital assets

McHenry wants Congress to develop crypto regulatory regime outside SEC, CFTC 

In addition to capital formation, a major focus for the House Financial Services Committee under a McHenry chairmanship would be developing a regulatory framework for cryptocurrencies and digital assets. At an event this week, McHenry said he does not believe digital assets fit the definition of a commodity or security, and therefore should not be regulated by the CFTC or SEC—the two primary agencies that have asserted jurisdiction in the space. Instead, he believes Congress should define digital assets and assign them a regulator better suited to oversee the nascent technology.  

Such a proposal would face heavy opposition from the market regulators. SEC Chair Gensler has stated he believes most digital assets are securities, and CFTC Chair Behnam has asked Congress for more authority for his agency to regulate the crypto spot markets. Both regulators would likely strongly object to any proposal that would take away their respective authorities, which could make it hard for such a framework to become law.

Stablecoin legislation, on the other hand, is much more likely, and McHenry is optimistic that Congress could move forward on a regulatory framework in the next year or so. Democrats and Republicans largely agree on key elements for regulating stablecoins used for payments, including that they are federally regulated, backed one-to-one by cash or high-quality liquid assets, and can be issued by entities other than just banks.

First major retirement plan provider announces plans for crypto investment offering

This week, crypto took a step toward more mainstream acceptance when Fidelity—the country’s largest administrator of retirement plans— announced it would soon make Bitcoin an investment option for 401(k) plan sponsors. Under the plan, participants could allocate as much as 20% of their assets to Bitcoin, though other digital assets are expected to be made available in the future. This move comes after recent DOL guidance expressing concerns about cryptocurrencies being included in retirement plans and cautioning plan fiduciaries to “exercise extreme care” before adding such options to investment menus. Such a move is likely to attract scrutiny from the regulator, who is expected to conduct investigative programs aimed at plans offering crypto investments. 

States aim attention at crypto asset investments for tax revenue

States are following federal policymakers in directing their attention to crypto asset investments for tax revenue. Recently, New York Attorney General Letitia James issued a clear warning to digital asset tax advisors and investors to pay taxes on virtual investments or risk being the target of a False Claims Act (FCA) investigation, which includes triple damages, interest, and penalties. Several states, including Delaware, Florida, Illinois, Indiana, Nevada, New York, Rhode Island, and D.C. authorize FCA suits based on tax liability due to not reporting income. More states are beginning to enter into this area of emerging law by amending their FCAs to enable cases based on tax claims that may bring both civil and criminal penalties. 

Financial products

CFPB expand supervisory authorities

The CFPB on Monday invoked a long-dormant authority under Dodd-Frank to expand its supervisory authority to non-bank entities—including financial technology companies—whose activities the CFPB has reasonable cause to believe pose risks to consumers. An accompanying procedural rule helped clarify the CFPB’s policy and is designed to increase the transparency of the risk-determination process. The CFPB will now invoke these procedures to address the rapid growth of consumer offerings by nonbanks and Chopra touted the authority as giving the agency “critical agility to move as quickly as the market.” 

Taxation

Treasury and IRS invite the public to submit 2022-2023 Priority Guidance Plan (PGP) recommendations

Treasury’s Office of Tax Policy and the IRS issued their Priority Guidance Plan, which outlines tax policy priorities the administration plans to address through regulations, revenue rulings and procedures, notices, and other guidance. The IRS has invited the public to provide recommendations on items to be included on their 2022-2023 plan, and Carta’s Policy Team will work with stakeholders to identify and submit our priority items. Although still developing our response, we expect to recommend the following items:

• Allow e-filing for 83(b) elections, which enable founders and employee-owners to accelerate a portion of their tax liability on equity ownership to the date of acquisition;

• Extend the time window to qualify for incentive stock option (ISO) tax treatment by increasing the Post-Termination Exercise (PTE) period from 90 days to the natural life of the option; 

• Provide guidance on the amortization of research and experimental expenditures; and

• Provide guidance concerning the taxation of virtual currency.

We welcome input on tax policy priorities that you would like us to communicate to the IRS.  If you have specific items or would like to discuss further, please contact us at policy@carta.com.  

Antitrust, privacy, & technology

Commerce supports antitrust bill

Commerce Secretary Gina Raimondo announced the department supports the American Innovation and Choice Online Act, which would block dominant online companies such as Amazon, Apple, Meta and Google from favoring their products on their platforms. The Commerce Secretary’s remarks add to the Department of Justice’s support letter. The Senate Judiciary approved the bill on a bipartisan vote of 16-6, but even supporters note the need to make adjustments to the text as it proceeds forward.

FinCEN lacking proper funds

While testifying before the House Financial Services Committee, Financial Crimes Enforcement Network (FinCEN) Acting Director Himamauli Das said the agency cannot handle the responsibilities Congress has delegated to it without more funding. FinCEN is juggling competing priorities like sanctions against Russian oligarchs, implementing new rules required by anti-money-laundering legislation Congress passed in January 2021, and enforcing financial regulations in the cryptocurrency space. FinCEN is also working on a reporting regime for beneficial owners to identify people behind anonymous shell companies. The agency received over 240 comments on its beneficial owner proposal in December, though the timing of the final rule is “not clear yet.” 

Upcoming events

• Ninth Annual Conference on Financial Market Regulation with remarks from SEC Chair – May 6 at 9:00 am (ET)

• SEC Small Business Capital Formation Advisory Committee meeting – May 6 at 10:00 am (ET)

• SEC Enforcement Director to deliver keynote address at Securities Enforcement Forum West – May 12 at 11:15 am (ET)

• CFTC staff roundtable on non-intermediation – May 25 at 9:30 am (ET)

Notable SEC proposed rules and comment deadlines

*60-day comment period after publication on SEC website or 30 days after publication in Federal Register, whichever is longer.

Sign up below to receive Carta’s Policy Weekly Brief:

DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security.  Carta does not assume any liability for reliance on the information provided herein.

All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement.